B.R. Baskaran, A.M.

1. These appeals of the Assessees are directed against the orders passed by learned CIT, Rajahmundry in their respective hands under Section 263 of the Act for the assessment year 2007-08. Certain issues urged in these appeals are identical in nature and hence they were heard together and are being disposed of by this common order for the sake of convenience.

2. All the grounds raised by these Assessees are relating to the validity of initiation of revision proceeding u/2 263 of the Act.

3. All these Assessees are engaged in trading of Indian Made Foreign liquors (IMFL). During the course of assessment proceedings, the Assessing Officer noticed that these Assessees could not substantiate the sales value with proper sales bills. Hence the Assessing Officer rejected the books of account and estimated the income from IMFL business at 4%/ of the purchase value in the case of Errada Sumathi and 5% of the purchase value in other two cases. The Learned CIT, by invoking the provisions of Section 263 of the Act, directed the Assessing Officer to complete the assessment afresh after examining following issues.

(A) Errada Sumathi:

(a) Estimation of Profit.

(B) Chinta Sridhar:

(a) Estimation of Profit.

(b) Verification of sources for capital introduction.

(c) Verification of genuineness of credit Ors.

(d) Verification of personal drawings.

(C) Jasti Srinivasa Rao:

(a) Estimation of Profit.

(b) Verification of sources for capital introduction.

(c) Verification of genuineness of credit Ors.

(d) Verification of personal drawings

The Assessees are challenging the order of Learned CIT before us.

4. The first issue, which is common in all the three appeals, relates to the estimation of profit. As stated earlier, these Assessees are engaged in the business of trading in IMFL. The Assessing Officer estimated the income at 4%/5%, as the case may be, of the purchase price. The Learned CIT was of the view that the Assessing Officer should have followed the decision of jurisdictional ITAT, Visakhapatnam in the case of ACIT v. M/s M. Veerabhadra Rao and others in ITA Nos. 345 & 346, where in it was directed to compute the sales at eight times of purchase price and then to estimate net profit at 1% of the said estimated sales value. It was also held therein that if the profit so computed is less than the profit declared by the Assessee, then the profit declared by the Assessee should be taken. The Assessee explained that the said decision was rendered in the case of "Arrack business" (country liquor) and hence the said decision is not applicable to these Assessees as they are trading in IMFL, which is a different product. It was further explained as under:

in the arrack business the cost of arrack was very less and the excise duty was nearly seven times the cost of arrack. Where as in the IMFL trade, the cost of purchase of IMFL is substantially high but the license fee is low.

However, the learned CIT was not convinced with the said explanations, since he was of the view that the IMFL is another cheap liquor substituted in the place of country liquor or arrack and hence both stand on same footing. Accordingly he directed the Assessing Officer to estimate the profit as per the formula given by the ITAT in the case of M/s M. Veerabhadra Rao and others cited (Supra).

4.1 The Learned Counsel for the Assessees submitted that the Learned CIT is not correct in holding that both arrack business and IMFL business stand on the same footing, since the nature of both items, the methodology of sales, excise duty pattern etc. are totally different. Hence the decision Honble ITAT in the case of M. Veerabhadra Rao and others cited above cannot be applied to the facts of the instant cases. Even otherwise, the Assessing Officer has applied his mind and has taken a conscious decision to estimate the income at a particular percentage. Hence his order cannot be considered as erroneous and prejudicial to the interests of the revenue. The Learned Authorised Representative, in support of his contentions, relied on the order dated 13-11-2009 passed by this bench in the case of Mookambica Constructions in ITA No. 25/Vizag/2009.

4.2 On the other hand, the learned Departmental Representative submitted that the Assessing Officer has committed a fundamental error by estimating the net profit on the basis of purchases, while generally gross profit is estimated on sales. Any case, the Assessing Officer has not brought any comparable case from the same area in support of the rate of profit adopted by him. He further submitted that the observations of Learned CIT that both arrack and IMFL stand on same footing cannot be found fault with, when one has to estimate the profit on sale of those items.

4.3 We have considered rival contentions. The issue under consideration is the question of estimation of profit. As seen from the Assessment order, the Assessing Officer has adopted a particular method of estimation in order to arrive at the profit from the IMFL business carried on by these Assessees. It is a settled position of law that the Learned CIT cannot sit over judgment of the Assessing Officer, if he has adjudicated the issue in detail by passing a speaking order. In this case, there cannot be any dispute that the Assessing Officer has discussed in detail about the reasons for rejection of books of account and he has adopted a particular rate for estimation of the profit. The rate of profit adopted by the Assessing Officer for estimation of profit is correct or not is a debatable question. Otherwise, the Learned CIT has not pointed out any mistake in the said estimation which is erroneous and prejudicial to the interests of the revenue. The question, whether the decision of the ITAT in the case of M/s M. Veerabhadra Rao and others cited (Supra), which was rendered in the case of arrack business, shall apply to the IMFL business or not is also debatable question. Hence on a totality of facts, we are of the considered view that the estimate of profit made by the Assessing Officer cannot be considered as erroneous and prejudicial to the interests of the revenue. We accordingly set aside the order of learned CIT on this issue.

5. The next two issues relate to the direction issued by the Learned CIT in the hands of Sri Chinta Sridhar and Shri Jasti Srinivasa Rao to verify the sources of capital and also the genuineness of loan creditors. The learned CIT was of the view that the Assessing Officer did not properly examine the adequacy of sources of capital introduced by these Assessees and the genuineness of creditors. However, it was brought to our notice that the Assessing Officer did enquire about the sources of capital and also the loan creditors. In this connection our attention was invited to the letters issued by the Assessing Officer to both the Assessees and the replies filed by them. It is seen that the Assessing Officer has specifically asked for a copy of the capital account and also the sources for the same. The Assessing Officer has also asked for the confirmation letters from the loan creditors. The said letter was dated 09-02-2009 in the case Chinta Sridhar and 11-02-2009 in the case of Jasti Srinivasa Rao. Our attention was also invited to the replies filed by these Assessees in response there to. It is seen that both the Assessees have filed copy of capital account, sources for the same and also confirmation letters from the loan creditors along with loan account copies.

5.1 Accordingly, the learned A.R contended that the Assessing Officer has duly examined the issues relating to the sources of capital and also genuineness of loan creditors. Since the Assessing Officer was satisfied with the replies, no addition was made by him. He further submitted that the fact that the Assessing Officer did not discuss about the results of such examination in the assessment order does not mean that the Assessing Officer did not properly examine the said issues.

5.2 The Learned Departmental Representative accepted the fact that the Assessing Officer did raise queries on the impugned matters and these Assessees have also filed replies to those queries. However he submitted that the assessment order is not clear as to whether the Assessing Officer has properly applied his mind on those replies and has taken a conscious decision, as there is no discussion about the same in it. Accordingly he submitted that mere raising a query and filing the reply given by the Assessee cannot be termed as a proper examination.

5.3 We have heard the rival contentions on this issue. There is no dispute with regard to the fact that the Assessing Officer, in the hands of both the Assessees referred (Supra), did raise queries about the sources of capital and also about the loan creditors. These Assessees have filed account copies of the capital account and also loan creditor accounts along with the confirmation letters obtained from them. In the confirmation letters, the Assessees as well as the loan creditors have explained the sources for the money invested in the businesses. In the absence of any other contrary evidences, it is quiet reasonable to presume that the Assessing Officer did apply his mind to the replies filed by the Assessees in response to the queries raised by him and was satisfied with the explanations of the Assessee. It is well settled proposition now that the absence of discussion about the result of enquiry will not render the assessment order an erroneous one. Though the Learned CIT was of the view that the Assessing Officer did not properly examine the impugned issues; yet he has failed to demonstrate how the Assessing Officer has committed error in such examination which has resulted in an error in the assessment order which is prejudicial to the interests of the revenue. Hence we do not find any justification on the part of the learned CIT in directing the Assessing Officer to re-examine the impugned issues and accordingly we set aside his orders on these two issues.

6. The next issue relates to the direction issued by Learned CIT on verification of personal drawings. The Learned CIT noticed that the capital account filed by the Assessees Shri Chinta Sridhar and Sri Jasti Srinivasa Rao did not show any drawings for domestic purposes. Accordingly he directed the Assessing Officer to make necessary enquiries about the drawings for domestic purposes.

6.1 We notice that the Assessees did not withdraw any amount from the business capital for domestic purposes. Though the Assessing Officer did raise a query about the details of withdrawals for domestic purposes in the letter issued to the Assessees referred (Supra), it is not clear whether these Assessees furnished any reply in this regard, as the same is not available in the paper book filed by the Assessees. In the absence of any reply from the Assessees, it cannot be said that the Assessing Officer did examine the issue of withdrawals for domestic purposes. Hence, in our view, the Learned CIT is right in directing the Assessing Officer to examine the impugned issue of drawings for domestic purposes. Accordingly we uphold his directions on this issue.

7. In the result, the appeal of the Assessee in ITA No. 142/Vizag/2011 is allowed and the appeals of other two Assessees are partly allowed.

Pronounced in the open Court on 27th June, 2011.